The company I am employed with would like me to change our accounting method from cash accounting to accrual accounting.
I cant see any benefit to this because I track each contract & budget closely & the monthly management reports I produce / mainly budget reports shows them everything that they need to know. (ie every line is tracked showing the budget amount leftover, the only profit is the management fee plus a tiny amount of savings from the budget areas but all of this is tracked closely) We have detailed forecast in place where we track everything closely including all of the overheads.
They are concerned with what other businesses are doing & what financial reports external people would like to see ie if they wanted a bank loan or were to sell the business.
Accrual accounting is a lot of extra work because of the way our 7 contracts work.
Do any of you do Accrual Accounting?
What advise can I give to my directors about what external reports are important?
I feel that my view is not being considered & they are only listening to a financial consultant that they are paying £750 a day to view our accounting systems / reports.
I am pretty sure that all financial accounting, particilarly for a Ltd company has to be done on an accruals basis.
The financial statements have to reflect a true and fair trading position, and is the basis for CT computations.
Shaun is the probably the best person to advise further.
There are moves in the pipeline to allow soletraders/ partnerships, with a relatively small turnover to use cash accounting for tax purposes but I am not sure if it applies to Ltd companies
Thanks for the reply Bill, however I am talking about the Monthly accounting system.
The Year End Accounts are done via the accountants on an accrual basis, all of our contracts tie in with our year end so there are not many adjustments.
Also I do prepayments / accruals relating to things in the overheads ie rent / insurance
In January For one contract we might receive £100k income, of that £15k is our management fee ie Profit & the £85k is going to be spent at some point in the year.
Then we might pay for £30k of expenses in Jan, but £20k could relate to different months ie we pay £5k for accommodation in Jan, but the training course is not until Feb.
Every single sales invoice, purchase invoice relates to a different month!
Also when I have googled this small companies are classified under £5million turnover? It says the choice is yours!
Management accounts can be done pretty much as you like as they are an internal function however, as the management accounts generally feed from the same system that provides the information for the annual accounts then an accruals basis is basically built into the requirement.
The real question to ask is what information your accountants are given to prepare the accounts from? If a feed from the information that you are entering they you have no choice but to prepare your information on an accruals basis.... Well, there is a choice but who wants to have two systems running in parallel as they never both stay perfectly in line with each other (you wanted to reduce the work and my first suggestion is double it, lol).
Can you direct me to the page about the £5m turnover as my understanding was that as the cash basis does not give a true and fair view of an entities financial situation as at the date of the financial statements so is currently not a valid approach.... BUT, will be allowed again on a limited basis for micro businesses with less than £77k turnover from this April (they must have less than £77k turnover when they move to the scheme but need not move off it until they reach £150k).
Obviously from the figures given you do not fall into that category.
As I say, let me have that £5m link and I'll go and have a look what it's talking about.
kind regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Thanks for replying. Please can you look over my explanation & advise again?
I have been reading lots on this & The £5m turnover was just one reference from a website that compares cash accounting & accrual accounting. I am not talking about the statuary accounts requirement, just the different bookkeeping methods.
I am still unsure why you think I need to do accrual accounting? Here is an example of how one of our contracts work. Operating Budget - £900,000. Management Fee £180,000. Customer pays £900,000 / 12 equal instalments, & £180,000 / 12 equal instalments. Monthly Invoice £90,000
At the moment I would put the monthly invoice on to Sage, & put all of the supplier invoices / expenses on to Sage. Then at the end of the month I would print the activity reports & enter all of the expenses against each line of the budget. So if we had a £40,000 accommodation budget & we paid a £10k invoice then the budget line would show £30k left etc This provides us with the information that we need to run the business.
What benefit is there for me to deffer income every month, when we know the profit is just the management fee? The 12 instalments ties in with our year end. Then to move the expenses into accrual & prepayment accounts each month, ie we pay for 20x flights in June, but the training course & flight is not until July, Sept or Aug. Our whole monthly activity would not match & I would be doing tonnes of adjustment journals every month.
Miss_E wrote:I have been reading lots on this & The £5m turnover was just one reference from a website that compares cash accounting & accrual accounting.
Please can you supply a link so that I can check this out. There is an awful lot on the internet that is either incorrect, out of date or not meant for the UK.
I am not talking about the statuary accounts requirement, just the different bookkeeping methods.
The issue is that the bookkeeping is not divorced from the statutory accounts in the same way that a house is not divorced from its foundations. If you keep the books on a cash basis then all work would need to be redone for the statutory accounts making the whole idea of having a bookkeeper pointless (and the work of the accountant much more expensive).
I am still unsure why you think I need to do accrual accounting?
In my original reply I did say that for internal reporting there is no requirement to provide information on an accruals basis but if the books are being kept to feed into the statutory accounts then such is a legal requirement. (per IAS1, IAS8 and IAS18 under IFRS and FRS3, FRS5 and FRS18 under UKGAAP which is given legal standing by the companies act).
Here is an example of how one of our contracts work. Operating Budget - £900,000. Management Fee £180,000. Customer pays £900,000 / 12 equal instalments, & £180,000 / 12 equal instalments. Monthly Invoice £90,000
At the moment I would put the monthly invoice on to Sage, & put all of the supplier invoices / expenses on to Sage. Then at the end of the month I would print the activity reports & enter all of the expenses against each line of the budget. So if we had a £40,000 accommodation budget & we paid a £10k invoice then the budget line would show £30k left etc This provides us with the information that we need to run the business.
What benefit is there for me to deffer income every month, when we know the profit is just the management fee? The 12 instalments ties in with our year end.
Revenue must be recognised in relation to the income and expenditure to which it relates. Until it is earned any revenue received in advance is liability. Only losses are recognised immediately.
Take your case. you are thinking of the cashflow but ignoring the debt. This may make your figures look better for the month but they do not reflect the financial reality of your position.
There is also arguement to suggest that one should not recognise any income until one has performed the duty to which such income relates but that was overridden due to such reducing the usefulness of financial statements that include projects spanning more than one period (which to me sounds like the reintroduction of profit smoothing by the back door!).
As said before though, for management reporting it does't matter. Only for the statutory financial reporting. Your issue is not with your internal reporting but that your software does not tell you what you need because it needs to be two different things at once.
1) A feeder for the statutory Accounts
2) A management Reporting tools
The information required by each is quite different and because the statutory accounts have legal requirment behind them, they win.
Then to move the expenses into accrual & prepayment accounts each month, ie we pay for 20x flights in June, but the training course & flight is not until July, Sept or Aug. Our whole monthly activity would not match & I would be doing tonnes of adjustment journals every month.
I can see your problem but also see the thing that you are missing which is the ignoring of the liability that is built into the accruals approach.
For your internal cashflow forecasting would it not make sense to use something like Excel rather than trying to get Sage to be two things at once? I can't comment further on Sage as I don't like the product so don't use it. Someone like Mark may be able to help more on the whole question as to whether the information that you need to keep in Sage can be manipulated to give you the monthly cashflow reports that you want.
One last thing though. I would not advise adopting this approach but, the only time that your software needs to be compliant is when it needs to feed into the statutory accounts. Until that time, even though not a perfect sollution, provided that you can guarantee that the figures will be how they should be when they go to the acountant then there is flexibility in how and when you record income and expenditure.
Adoptying that approach is a recipe for disaster (something will be either missed or overstated) but I thought best that I included it as someone else will suggest that and at least mine comes with a public health warning.
Thanks!
No probs
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I used to work for a manufacturing company which designed,built and serviced specilised equipment. It was complicated because each contract could take 3 years, as the equipment was often being put into new factories that were also being built or being incorporated into assembly lines with other specialised equipment, which would mean shipping "kit" to the USA, back to us for adjustments, then to China, or eastern Europe. The design engineers would actually do all their own ordering, builds etc directly using the accounting package. So they created the purchase orders, system builds, stock info etc. The factory manager would convert the purchase orders on the accounts to confirm delivery and once I had all the paperwork I would input the final invoices and arrange payment. I just put the systems in place, showed everyone how to do their bit and kept an eye on it making no-one tried to take any short cuts! There was no need for any data input clerks etc. Just me checking what everyone else was inputting in the sytems was correct.
Getting rid of Sage and replacing it with a more "idiot proof" accounting package certainly helped reducing my work load. I used to manage the jounals by creating csv files and importing them each month into the intergrated accounting system which replaced Sage. But I used to do all the budgets, cashflows and monthly management accounts on excel spreadsheets. I also used to put the information directly into the spreadsheets from the invoices, because it was easier than taking it from the accounting system, and to be honest I didn't have much else to do most of the time, because as long as everyone followed all the correct processes, the papertrail was a doddle for everything!
Oh and the "Tax accountants" never had to do any year end adjustments to the accounts.
When you are bored - look up: UITF 40
-- Edited by YLB-HO on Sunday 17th of February 2013 11:33:09 AM
Thank you for the reply again. Our financial year end does tie in with the end of season of all of our contacts. Then the next month a new budget starts. When the accountants get the Sage back up, all I have to do is deffer income on ONE invoice. All of the expenses tie up with the year end date & end of budgets! Therefore the accountants task is easy!
The question to my employers is do they want to see an accurate P&L each month, where is at the moment each month does not relate to the income & exps in that ONE month. However the budget reports do show them everything that they need to know to track each contract. We have no variable factors that will effect the profit, so if I did adjustments journals each month the profit on the P&L will be the same each month.
I was hoping to hear from other bookkeepers that do the accrual accounting method. To see if there were other complicated business out there running several contracts where the accruals concept is not an easy task?!
Larger companies seem to have a management accountant as well as data enter clerks, payroll staff etc. I run the entire finance operation for the company & I think I am going to have to free up my work load if they want me to change my accounting system that I have been doing for years. Also to add - I have said to them that the most important factor in the monthly reports is that they have all the information that they need, in which they haven't argued that they dont they have just been advised from an outsider that we should be doing accrual accounting.
I will let you know how I am getting on in the near future :) Thanks.
All comes down to the cost v benefit analysis of doing monthly accounts on an accruals basis.
There will be a cost to doing all the adjustments given the additional time needed (plus these adjustments need to be reversed in the next month). The accruals basis will give the true and fair view on a monthly basis and will also tie in with how the accountant does the accounts at the year end.
If the benefit of doing this more than outweighs the cost ie are the figures materially different on an accruals basis as opposed to a cash basis to affect decisions of the directors then worth doing it. If not then it isnt.
Each business has to judge the above on its own merits.
takes an awful lot of continued study and accumulated experience to get to easy even for the simplest books.
I think Mark is much closer to that utopian ideal than myself.
I believe that Marks post nails the scenario perfectly in that it's all down to cost vs benefit... The downside is that employers never see that there is an associated cost to policy and procedure changes as the reality is that they probably have as little concept of the work that you put in producing the books as many bookkeepers perceptions of what the accountant does to turn those books into a set of accounts.
Good luck going forwards,
kindest regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
well, we seem agreed on Excel being the reporting tool of choice. Wouldn't take much to build a macro to take the CSV feed and build the management reports automatically each month removing the issue of human error from the equation (not trying to automate your job Emma, just the reports).
What was the system that your company replaced Sage with Frauke? Was it bespoke or maybe some addaption of SAP?
Good call of abstract 40. My first thought was FRS5 application note G.
all the best,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Thanks for replying. Please can you look over my explanation & advise again?
I have been reading lots on this & The £5m turnover was just one reference from a website that compares cash accounting & accrual accounting. I am not talking about the statuary accounts requirement, just the different bookkeeping methods.
I am still unsure why you think I need to do accrual accounting? Here is an example of how one of our contracts work. Operating Budget - £900,000. Management Fee £180,000. Customer pays £900,000 / 12 equal instalments, & £180,000 / 12 equal instalments. Monthly Invoice £90,000
At the moment I would put the monthly invoice on to Sage, & put all of the supplier invoices / expenses on to Sage. Then at the end of the month I would print the activity reports & enter all of the expenses against each line of the budget. So if we had a £40,000 accommodation budget & we paid a £10k invoice then the budget line would show £30k left etc This provides us with the information that we need to run the business.
What benefit is there for me to deffer income every month, when we know the profit is just the management fee? The 12 instalments ties in with our year end. Then to move the expenses into accrual & prepayment accounts each month, ie we pay for 20x flights in June, but the training course & flight is not until July, Sept or Aug. Our whole monthly activity would not match & I would be doing tonnes of adjustment journals every month.
Thanks!
Hi Miss E
How about splitting the mgt fee over the 12 months, but the budget income relate directly to budget expenses? To use your eg, every month: £15k mgt fee, £75k budget income. But if in Jan there were only budget expenses of £50k and in Feb there were £100k, defer £25k from Jan to Feb. That way the GP will always be £15k ie the mgt fee.
Seems a bit much to move the budget expenses to a different month, but would it be useful to management? eg which months are training courses more profitable or something?
Sorry had to go out straight after posting, so I didn't see your post until know. We replaced Sage L50 with "Enterprise" from Hansaworld. (http://www.hansaworld.com/global). The company still uses it today (even though I'm not there anymore), as it was all singing and all dancing etc. Not cheap - but not in the SAP league cost wise either! But best of all, it was really idiot proof. The Armed forces have a say, "everything needs to be squady proof" - Entreprise was more than just an accounting package.
no probs and many thanks for filling me in on that software.
I'll keep a note of that one for future reference as you never know when a client may be in the market for something better without as you say going to the expense of SAP.
On the armed forces saying I am just reminded of the old line.
"Make it idiot proof and they just invent a better idiot".
One of my more used one liners along with :
"Never underestimate the power of very stupid people in large numbers".
kind regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
After speaking it through with the Accountants they have agreed that I am doing everything correctly; which is good news to my ears!
They have said that our business model relates more closely to how a construction site works, where the expenses are identified to a specific contract.
The Profit & Loss report is produced at the end of the contract only.
We dont produce a monthly P&L because we know that the profit is just the management fee.
Our budget / Contracts runs to the same year end as our financial year, so come year end the full sales income has been raised, & the full budget & expenses have been spent.
Before going to see your accountants again, read IAS11 (construction contracts) and IAS18 (Revenue) which will better prepare you for the meeting.
As stated in my previous reply "Revenue must be recognised in relation to the income and expenditure to which it relates. Until it is earned any revenue received in advance is liability. Only losses are recognised immediately".
Which is what your accountants are now concurrig with.
Its good (if somewhat unusual) when accountants agree. lol.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Like cash-basis accounting, accrual accounting has its drawbacks. It does a good job of matching revenues and expenses, but it does a poor job of tracking cash ...
<< Link removed to prevent SEO activity >>
-- Edited by Shamus on Thursday 28th of February 2013 01:14:45 PM
Yes, just like it says in the dummies guide where the quote was cut and pasted from.
your banned.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Well i was just thinking how our moderator has had a pretty quiet week lol.
Never really understood the banning on this site in that the user remains active but I effectively jump up and down on their IP address.
I appreciate thats so that they can't just set up a new account and post again but don't understand why the original userid remains active which is surely going to skew the site statistics in relation to the number of active members?
Oh well, yes, quiet on the site (although still policing in the background) pretty busy off it.
Talk later matey,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Apologies if this has been mentioned already in this thread, I have just skimmed over some posts but does Sage not give you the option of producing both cash and accrual reports? I don't really use Sage much anymore, I do have it on my office PC but prefer QuickBooks Pro as I have some clients who produce their own invoices and they make fewer mistakes, plus their reporting system is far superior. I can produce a P&L report on QuickBooks, which is pre-set to accrual, but I can modify the report settings to cash reporting if I so wish, it's something I rarely use but the option is there.
I know Sage reports are not interactive like QuickBooks, so if this option is there on sage it would be in the background somewhere.
